Legal Standing In Corporate Litigation: Who Can Sue and Be Sued?

Business litigation lawyers are often asked to evaluate the legal standing of a party to a lawsuit.  “Standing” is a legal term of art which refers to a party’s right to sue or be sued.  In corporate litigation I often see confusion as to this issue, even among attorneys.

In corporate litigation the confusion often arises when an individual or corporate shareholder does not respect the separateness of the corporation in which they own shares.  Each corporation is a separate legal entity.  It must enter into contracts in its own name and it must sue or be sued in its own name.  While there is an exception to this general rule when a party is able to ‘pierce the corporate veil’ through alter ego, the general rule is the more common situation.

I am currently involved in an international business arbitration between two foreign corporations.  In this case the defendant corporation ‘controls’ numerous other corporations which own other corporations.  The parties use the names of the various corporations interchangeably in their contracts.  The defendant/respondent corporation has entered into a contract purporting to obligate another corporation to a debt to numerous other corporations  (which are not parties to the contract).  The plaintiff/petitioner corporation is not a signator to the original contract but is ‘controlled’ by the same individual shareholder.  Moreover, the plaintiff is suing the defendant over the debt outlined in their contract, but, of course, that debt was owed by a third party corporation to numerous other corporations that are not parties to the contract.  It is enough to make your head spin.

The majority shareholder who is my contact and his foreign-based lawyer keep reminding me that ‘corporation x controls corporation y’ and ‘I own that corporation’.

I am having to educate my client and his attorney on the idea that the plaintiff must have standing to pursue this claim.  Each corporation is a separate legal entity in the eyes of the law.  The fact that they may have common shareholders does not mean that a different corporation has standing to sue on the original contract.  The contract may have been assigned but we would have to establish that.  The first thing the arbitrator has noticed is that the plaintiff is not one of the parties to the contract.  He therefore, quite rightly, asks how does this plaintiff who is not a party to the contract have standing to invoke the arbitration clause between two other corporations?

There is also an issue as to how the plaintiff can sue the defendant.  The defendant is a party to the original contract but it is not the party who was allegedly obligated to pay money.

And the party who was allegedly obligated to pay the money is not even a party to the contract in which this purported obligation was decided upon.

All of the problems in this case come down to the original contract that the parties entered into.  The lesson learned in this case is to have an experienced business lawyer draft the contract in the first place.  Moreover, the contract provided for arbitration in California and pursuant to California law.  In this case it would have made sense to have a California lawyer draft or at least review the contract to make sure that it complies with California law.  In a more general sense business owners need to be aware that corporations are separate legal entities and must be treated as such.  Contracts should use the complete and proper corporate name.  They should be signed as a corporate officer and not as an individual.  Flaws in standing can defeat a lawsuit before it even gets started.